The IR35 Realities

IR35 is always a hot topic generating a lot of discussion and opinion. It has been around for 15 years with an enormous amount of history but still the precise definition of IR35 is woolly at best with the number of investigations opened by HMRC resulting in a “win” still being very small as a percentage of the total number opened.

So how come common sense hasn’t prevailed and this piece of legislation withdrawn as being almost unenforceable in its current form?

What is IR35?

As usual Wikipedia can be referenced to provide an easy to understand definition of IR35 describing it as the UK tax legislation designed to tax “disguised employment” at a rate similar to employment.

The infamous GOV.uk website describes it as “Intermediaries legislation (known as IR35) is the tax and National Insurance contributions legislation that may apply if you’re working for a client through an intermediary”.

Put simply it is an unclear and imprecise piece of legislation which tries to tax those who work on temporary assignments, in temporary places of work being paid a defined rate without any employment benefits including sickness, pension, maternity, paternity, redundancy protection and so on.

Office of Tax Simplification Review

The Office of Tax Simplification (OTS) undertook an IR35 review back in 2010 and concluded that “any simplification of IR35 will need to provide an alternative regime to tackle the tax avoidance IR35 was originally set up to tackle” (source – Contractor Calculator web site).

The OTS report went on to say “IR35 should be suspended or better enforced by HMRC, until it is made irrelevant by structural reform of the UK tax system, which could be done by merging income tax and National Insurance Contributions (NICs). “ (Source http://www.contractorcalculator.co.uk/ir35_review_ots_suspend_enforce_income_tax_ni_379110_news.aspx).

Business Entity Test and its demise

Instead of that happening in 2012 we got the notorious “Business Entity Test” which was so good that less than three years later it is being withdrawn.

Yet another waste of time and money on this virtually unenforceable piece of legislation.

HMRC cases increasing – for Government contractors?

That aside my understanding is that the number of IR35 investigations opened over the last 18 months has increased dramatically.

I am also lead to believe, although this is as yet unverified, that of these over 50% were investigations started into workers who hold or had held a public sector contract.

No surprise there as back in February 2013 I reported that a list of all contractors working at the Student Loan Company had been passed to HMRC and they had all been told that they were caught within IR35.

I wonder how many more lists of contractors have been passed from Government departments to HMRC.

I had heard that many workers on the GOV.uk project are contractors – I do wonder if they are operating within or outside of IR35 #justsaying.

A real example – the stress factor

Some two and a half years ago an accountant pal of mine told me about a case of one of their clients who, having worked on a very short term Government contract, ended up the subject of an IR35 investigation.

The HMRC case worker sent numerous letters asking for mountains of information resulting in the worker needing to pay for expert representation. Despite answering all of the letters and providing the information requested the case dragged; as one request was satisfied another request emerged – it was never ending and the stress of the investigation for the worker was enormous .

The end result – a new HMRC case worker was assigned who reviewed the investigation and concluded there was no foundation to pursue the matter and it was dropped!

Good news for the worker but at what financial and emotional cost for them let alone the amount of public money wasted on the failed investigation.

It seems commonplace for there to be haphazard handling of cases by HMRC assuming that the worker is guilty until proven innocent. Random and numerous amounts of information request are made and still HMRC seem incapable of being able to swiftly conclude if the worker is operating within or outside of the IR35 legislation.

Of course HMRC offer no compensation for the costs and stress incurred by undertaking these unsuccessful reviews – that’s scandalous!

There is no deterrent to prevent HMRC from opening up frivolous investigations without chance of success, no standard to ensure that the investigations are handled swiftly and robustly once opened and no review process to close the case swiftly if no immediate evidence of IR35 contravention is found.

That is just wrong!

What’s the tax issue?

If you operate through an intermediary (your own limited company) then you can withdraw profits from the company by way of a small salary and dividends. Dividends do not attract national insurance.

So the worker can receive more pay, after tax, than if he or she were an employee operating under PAYE.

So the issue is one of equality of taxation or as some describe “fair taxation” although I have yet to find a fair definition of fair!

Employment Status Indicator – Yes or No

Of coursed IR35 comes back to the determination of whether a worker is an employee or not. To this end HMRC are now working on trying to come up with an Employment Status Checker that will give a Yes (you are an employee) or No (you are not an employee answer).

Yeah right – if that was possible it would have been done ages ago and none of the IR35 debacle would have happened.

The issue is that in life things are not always black and white.

If the UK wants a flexible workforce then surely there is a place for contact workers; surely those who are prepared to have no job security and benefits of employment should be paid at a higher rate than those with security of tenure?

Would it be good for the recovering economy to make all workers employees with full employment protection and associated benefits?

Is the IR35 issue just one of “fair tax”?

My advice

One word – protection!

If you are a temporary worker then get your contracts reviewed by a reputable expert for each role that you undertake. Make sure that the expert will give you an opinion on whether the work is likely to be within or outside of IR35.

Of course having the contract review will not stop HMRC opening an investigation which may or may not succeed. So even if you’ve had the contract reviewed make sure that you have tax investigation protection insurance so that at least you are not left out of pocket by an IR35 investigation although, of course, this cannot protect from the stress and anxiety suffered.